INDIAN FINANCIAL SYSTEM

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What is the meaning of Finance ????

The term "finance" in our simple understanding it is perceived as equivalent to 'Money'. We read about Money and banking in Economics, about Monetary Theory and Practice and about "Public Finance". But finance exactly is not money, it is the source of providing funds for a particular activity. Thus public finance does not mean the money with the Government, but it refers to sources of raising revenue for the activities and functions of a Government.

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What is the meaning of system ?????

The word "system", in the term "financial system", implies a set of complex and closely connected or interlined institutions, agents, practices, markets, transactions, claims, and liabilities in the economy. The financial system is concerned about money, credit and finance-the three terms are intimately related yet are somewhat different from each other. Indian financial system consists of financial market, financial instruments and financial intermediation.

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Financial system - Introduction

• The economic development of a nation is reflected by the progress of the various economic units, broadly classified into corporate sector, government and household sector.

• While performing their activities these units will be placed in surplus/deficit/balanced budgetary situations.

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Flow of fund(saving)

Flow of financial services

Incomes, and financial claims

Seeker of fund (mainly business

firm and government )

Supply of funds (mainly household)

There are areas or people with surplus funds and there are those with a deficit. 

A financial system or financial sector functions as an intermediary and facilitates the flow of funds from the areas of surplus to the areas of deficit. 

A Financial System is a composition of various institutions, markets, regulations and laws, practices, money manager, analysts, transactions and claims and liabilities.

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INDIAN FINANCIAL SYSTEM Indian financial system can also be broadly classified

into the formal (organized and financial system and the informal (unorganized) financial system

The formal system comes under the purview of ministry of finance (MOF) RBI , SEBI and other regulatory bodies

The informal system consist of : Individual money lender such as neighbors , relatives,

traders, store owners etc. Group of persons operating as funds or associations Partnership firms consisting of local borrower, NBFC’s

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Constituents of an Indian Financial System

Financial Institutions

Financial Market

NBFC’s

Merchant Banking

Money Market

Shares

Financial servicesFinancial Instruments

Commercial Banks

Provident Funds

Industrial Banks

Project ConsultancyCapital Market

Commercial Paper

Mutual funds

Debentures/Bonds

Government Bonds

Certificate of Deposits

Mutual Fund Units

Public Deposits

Insurance Policies

Financial Institutions: Financial institutions are the intermediaries who facilitates

smooth functioning of the financial system by making investors and borrowers meet.

They mobilize savings of the surplus units and allocate them in productive activities promising a better rate of return.

Financial institutions also provide services to entities seeking advises on various issues ranging from restructuring to diversification plans.

They provide whole range of services to the entities who want to raise funds from the markets elsewhere.

Financial institutions act as financial intermediaries because they act as middlemen between savers and borrowers. Were these financial institutions may be of Banking or Non-Banking institutions.

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Financial Markets

A Financial Market can be defined as the market in which financial assets are created or

transferred. As against a real transaction that involves exchange of money for real goods or

services, a financial transaction involves creation or transfer of a financial asset.

Financial Assets or Financial Instruments represents a claim to the payment of a sum of money sometime in the future and /or periodic payment in the form of interest or dividend.

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Classification of Financial Market

On the basis of maturity of securities

On the basis of seasoning of

claim

On the basis of timing of delivery

On the basis of organizational

structure

Money market

Capital market

Primary market

Secondary market

Cash or spot market

Forward of future market

Exchange market

Over the counter market

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Distinguish between Money Market and Capital Market

DIFFERENCE MONEY MARKET CAPITAL MARKET

Maturity of funds Less than one year Above one year

Instruments Call Money market , Treasury Bills(TB), CB , CP, CD’S, MMMF

Equity, Shares, Debentures, government securities and loan

Existence of secondary market

No YES

Place of market No Specifies Place Stock Exchange11

Financial Services

• Financial Services is concerned with the design and delivery of advise and financial product to individual and business.

• Financial Services is concern with advisory services & financial product and both are provided mainly by NBFC , Merchant banking services

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Financial services falls into two broad categories

Asset/Fund based Financial Services

• Financial evaluation Leasing • Hire purchase • Factoring & Forfeiting• Bills Discounting• Housing Finance• Insurance Services and product • Venture capital financing

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ASSET /FUND BASED FINANCIALSERVISCES

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Fee based /Advisory Financial Services

• Issue Management Intermediaries• Issue Management Activities/ Procedures• Issue Management Pre Issue and Post Issue

obligations and other requirement • Corporate Restructuring • Stock Broking , Depositories , custodial Services &

Securities Lending Scheme • Credit Rating

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Structure of Indian financial Regulatory Institutes

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RBI SEBI

NBFC’s

IRDA

Public and PVT commercial

Bank

All India development

bank

Refinance Institutes

NABARD, NHB

Venture Capital fund

Mutual Fund Units

Private sector Insurance

Companies

Public sector Insurance

Companies